How will he pay for it? Fiscal realities put Obama agenda in question

Published at 5 a.m. ET: Less than one month into his second term, President Barack Obama looks to complete the outlines of an ambitious agenda in his State of the Union address Tuesday night.

In his inaugural speech, the president telegraphed several initiatives he wants Congress to pursue and pass this year: gun control legislation, a bill to create a legalization process for many of the nation’s illegal immigrants, subsidies for renewable energy technologies and legislation to respond to climate change.

Obama will likely return to those topics Tuesday night, but the White House has signaled that this speech will focus more on the themes that dominated the past four years -- jobs and the economy -- with new initiatives aimed at improving the prospects of growth for both, and a particular emphasis on the middle class.

But any new policies or programs will have a cost to both present and future taxpayers, and it will take some time to figure out that cost because the president hasn’t yet presented his budget proposal to Congress. And when he does, the ongoing standoff between Republicans and Democrats over everything from how to continue funding the government to looming spending cuts still leaves plenty of uncertainty about any fiscal policy in Washington.

President Obama is set to focus on jobs and the economy during Tuesday's State of the Union. NBC's Peter Alexander reports.

Due a week ago, but not likely to appear until sometime next month, the president’s budget proposal is the detailed and lengthy (last year’s was 256 pages long) blueprint in which a president gives Congress and taxpayers all the specifics -- how much each new initiative will cost and what tax proposals he is offering to help to pay for his programs.

The budget document is the president’s attempt to direct spending policy for the coming fiscal year -- the one that starts on Oct. 1 -- and for the ten years beyond that.

This year there’s an air of unreality about the budget compared to, for instance, 2009 when the president’s Democratic allies controlled both the House and the Senate. Exactly four years ago, when Obama proposed to collect $646 billion in new revenues from auctioning off greenhouse gas emission allowances, there was a reasonable expectation that the proposal would become law and that the $646 billion would flow into the Treasury.

When Obama does deliver his budget proposal next month, the fiscal path forward will remain in an extraordinarily makeshift and unpredictable state.

Budget 'harder to predict' than everVeteran budget analyst Stan Collender wrote this week that even former congressional Budget Committee staffers who have spent their careers assessing budgets find that “the current situation is as complex, hard to read, and even harder to predict than any they’ve ever seen.”

The federal government is now operating on a six-month continuing resolution which keeps discretionary spending for departments and agencies at the prior year’s levels.

Mandatory spending for Social Security, Medicare, Medicaid and federal employee retirement benefits is driven by demographics, enrollment, and the cost of medical procedures. It isn’t as controllable by Congress or the president.

The continuing resolution expires on March 27, leaving Obama and Congress only a few weeks to figure out what to do next. Another stopgap continuing resolution seems quite possible.

In addition, the Budget Control Act requires $85 billion in spending cuts to begin on March 1.

Illustrating just how unreal the current fiscal situation is, Defense Secretary Leon Panetta said in his farewell address last week at Georgetown University that if Congress passes another continuing resolution and it allows the spending cuts required by the Budget Control Act to take effect, then his department “will have to abruptly absorb in a period of about six months” $43 billion in spending cuts (known as the sequester). This will be on top of what Panetta thinks are inadequate spending levels in the continuing resolution -- what he described as “a $35 billion shortfall in operating funds for our active forces.”

Kevin Lamarque / REUTERS

President Barack Obama speaks from the briefing room of the White House in Washington Feb. 5, 2013.

Panetta explained that the Pentagon has been spending money at a relatively robust rate level so far this fiscal year. “We assumed, silly us, that we would get a 2013 appropriation, what we requested,” he said. “And so we're operating on this hope that 2013 appropriations bill will be passed. It hasn't been passed.” And yet the Defense Department has been spending money as if it would be passed.

With both the sequester and another continuing resolution looking possible, Panetta is now facing, and leaving his successor with, “a serious disruption in defense programs and a sharp decline in our military readiness.”

Reminding his audience how big an employer the Department of Defense is and how large an economic effect it has, Panetta said, “If sequester happens, let me tell you some of the results. We will furlough as many as 800,000 DOD civilians around the country for up to 22 days. They could face a 20 percent cut in their salary.”

Other departments and agencies would need to take similar steps.

Given such a crisis atmosphere, one could see why Obama’s proposals for new programs and new spending might get overshadowed and might stand little chance of being adopted.

Disaster spendingAnd yet Obama and members of Congress have been extremely lucky in one sense. The last few years has been a good time to be in charge of fiscal policy, thanks to ultra-low interest rates which mean an ultra-low cost of financing the federal government’s borrowing.

That will end in the next several years. The Congressional Budget Office, in its annual budget forecast last week, projected that what the federal government must spend on net interest payments will more than double in the next five years and will nearly quadruple by the end of the 10-year budget forecasting period. Instead of spending six cents of every dollar to pay interest on the debt, the government will be spending 14 cents of every dollar on interest payments in 2023.

By 2020 the government will be spending more on interest than it will spend on national defense.

In the short term, the good news for Obama is that the economy is recovering and with that recovery has come a surge in federal tax revenues, which are up 12 percent in the first four months of Fiscal Year 2013. Individual income tax revenues are up by 16 percent so far in FY2013.

Keep in mind that revenue surge has come even before the full impact of the $700 billion tax increase that Obama signed into law on Jan. 2. The increased revenues from that tax increase will show up in withholding from paychecks in 2013 and also will be seen in the income tax payments Americans must make when they file their tax returns in April 2014.

Given the need Obama sees for even more revenues, don’t be surprised if you see some of the very same ideas in the State of the Union and the budget blueprint that he proposed back in 2009 in his very first budget proposal, such as taxing a form of investment income called “carried interest” as if it were ordinary income and eliminating of certain tax preferences for oil and gas firms.

But while some things might be the same as in 2009, in one part of the budget one thing is quite different: in Obama’s first budget proposal in 2009 he and his number-crunchers projected that in the current fiscal year, FY 2013, the federal government would need to spend $20 billion on disaster relief. That disaster spending prediction will turn out to be far short of reality: Obama has already signed into a law a disaster relief bill for Hurricane Sandy that will cost $50 billion -- and the hurricane season does not being until June 1.